Atlantic Tele-Network - Great Management, Huge Net Cash, Undervalued Segments

Jul.30.14 | About: ATN International, (ATNI)

Summary

ATNI is an undervalued telecom holding company, with net cash close to 50% of its market cap.

The company has great history of growing shareholder equity (about 15% per year from 1998) and value.

The stock has close to 100% potential upside and small downside, if capital allocation success continues.

Atlantic Tele-Network (NASDAQ:ATNI) is a "telecommunications holdings company that provides wireless and wireless telecommunications services in North America, Bermuda and the Caribbean" (taken from the ATNI homepage). The company can be divided into four segments: U.S. Wireless, U.S. Wireline, International Integrated Telephony (wireless plus wireline; ATNI owns 80%), and Island Wireless (ATNI owns 42%). In September 2013, the company sold its U.S. retail wireless operations (Alltel) to AT&T (NYSE:T) for $780 million (plus $17 million in working capital adjustments), making a net profit of $307 million from the transaction. What makes this sale even more compelling is that ATNI bought Alltel in 2010 for around $200 million, funded with $150 million of debt. That's impressive work by the management.

Cases

One decent way to value the company is to take a look at its operating segments and their EBITDAs, doing a sum-of-the-parts analysis. The numbers and information below are from ATNI's 10-Ks and 10-Qs. (see ATNI's EDGAR page).

U.S. Wireless:

2011: EBITDA 59m / 59%

2012: 76m / 73%

2013: 69m / 63%

The biggest contributor to EBITDA, U.S. Wireless, has been growing nicely over the years (15% per year from 2011) and is superbly profitable. Bigger and less profitable, Alltel was sold for approximately 7.7 times EBITDA. Therefore it seems fair to say that the U.S. Wireless segment is worth 7-9 times EBITDA (in a more optimistic scenario one could see it being worth 10x EBITDA). With FY 2015 estimated EBITDA being $70-$80 million, we get an EV range of $490-$720 million.

U.S. Wireline:

2011: EBITDA $3.3m / 16%

2012: $0.4m / 2%

2013: $2.1m / 10%

The U.S. Wireline segment is the least profitable part of ATNI. The company has invested in this segment, but in Q1 2014 didn't see any major improvements. It is difficult to say whether it'd be able to produce +$5 million EBITDA, and therefore one should conservatively estimate FY 2015 EBITDA to be $2-$4 million. Giving an EV/EBITDA of 5-7 puts the EV at $10-$28 million. Another way to look at this segment could be its assets. In March 2014, it had total assets of $43.5 million, including goodwill of $7.5 million.

International Integrated Telephony:

2011: EBITDA $45m / 48%

2012: $41m / 43%

2013: $46m / 49%

GT&T's (owned by ATNI) exclusive license rights under Guyana's constitution were challenged by Digicel in 2009. ATNI is "vigorously" defending against the legal challenge of its exclusive rights, although the end result is uncertain. Because of these problems, revenues and profits have been in a slight decline. With the uncertainties and weakening revenues, assuming FY 2015 EBITDA (ATNI's share) of $25-$30 million should be on the conservative side. With a multiple of 4-6 we get an EV of $100-$180 million.

Island Wireless:

2011: EBITDA $2m / 4%

2012: $8m / 13%

2013: $19m / 28%.

Island Wireless has been growing rapidly. From 2011 to 2013 revenues have gone up 15% per year, and most of the extra revenues have gone to the bottom line. Estimating FY 2015 EBITDA (ATNI's share) at $10-$15 million, and putting a multiple of 7-8 gives an EV of $70-$120 million.

ATNI currently has about $410 million in net cash (we'll assume the company doesn't generate FCF the next two years to be conservative). Putting it all together, we get the following range of fair EV: $670-$1050 million plus $410 million net cash, translating into a market cap of $1080-$1460 million in 2015 (upside of 25-70% from $860 million).

To summarize, the case is basically relying on the abilities of management to allocate the net cash profitably (as it has done in the past) and that the market notices the company is selling for less than what it's worth (multiple expansion). It's also possible that the market is waiting for the company's next move, implying that before any meaningful multiple expansion takes place the company needs to show its capital allocation skills again. Besides the fact that management has made some brilliant moves in the past regarding capital allocation, its incentives should be well aligned with minority shareholders as the family owners (Michael and Cornelius Prior) own 36% of the company.

Risks

As we said earlier, the market is either missing the value of the company or waiting for it to make a big move with the cash. Telecommunications business in general is usually quite stable. There are risks of declining revenues in some of its segments, but investors seem to be more than compensated for these risks via cheap valuation.

The major risk, and also the opportunity, is with the capital allocation decisions of the management. They're constantly looking for opportunities to invest the cash in, without finding an interesting place so far. If the next big move shows to be a big miss, the market cap could find itself at $200 million or so lower. On the other hand, if they succeed again the $1500 million market cap is closer than one might think.

Catalysts/What to Follow

One thing to note is the importance of keeping an eye on the use of cash -- in other words, what and at what price will the company buy. Management has been and still is looking hard at potential acquisitions. Assuming they'll try to find a target of at least +$400 million, what this purchase is and at what valuation it is made will have a large effect on ATNI's price.

Also, growth (U.S. and Island Wireless) and decline (International Integrated Telephony) of the different segments is an important factor in the future, although in the short term perhaps not as important as capital allocation. If U.S. and Island Wireless divisions are able to grow at the numbers (+10%) they've grown in the past and at the same time International Integrated Telephony avoids collapse, ATNI can be expected to trade sooner or later at significantly higher multiples.

The Q2 report (June 30) and management's comments will be interesting, especially with regard to comments on the use of cash and what the company sees regarding acquisitions. Longer-term investors should probably avoid drawing bigger conclusions about the growth or decline in the different segments during one quarter.

If one finds the above analysis reasonable and believes the company is undervalued multiple-wise, it can be a decent bet at these prices as it offers a nice upside for those patient enough to wait one to two years with quite limited downside. For investors who see a spot in their portfolios for a telecom, ATNI is definitely not a bad choice. However, it is essential that investors realize that they are betting that management won't, at the least, destroy the net cash in an expensive or otherwise bad acquisition.

Disclaimer: Please do your own due diligence. There's always a risk of losing one's principal.

Disclosure: The author has no positions in any stocks mentioned, but may establish a position in ATNI in the next 30 days. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.